Life Settlement Laws & Regulations
The recent expansion of the life settlement market can be attributed due to the changes in life settlement laws and regulations since 2008. The overdue passing of laws and regulations have increased consumer awareness, increased investor interest, brought back institutional capital, and returned an industry, previously on life support, back to good health.
Only a handful of states still have pre-2008 regulations in place. Only 6 states have no regulations at all.
Michigan and New Mexico regulate viatical settlements only, while Alabama, Missouri, South Carolina, South Dakota, Wyoming, and Washington, D.C. do not regulate viatical nor life settlements. Most unregulated states and states that regulate viaticals only, with the exception of Missouri, who has a one-year contestability period, have a two-year contestability period under their general insurance code.
States With Little To No Regulation
|States Without Regulations||Pre 2008 Life Settlement Laws||Regulates Viaticals Only|
Majority Of America Now Protected
All but 6 states now regulate life settlements, including Puerto Rico. It’s estimated that around 90% of the entire US population is protected by life settlement laws and regulations. This is a tremendous increase in the government’s involvement since the market’s decline of 2008. These laws and regulations have increased the quality and size of the market.
With actions like a state’s disclosure laws in place, more policyholders qualified for life settlement transactions, are being made aware of the life settlement option by the insurance carriers. Additionally, with the increase in qualified policies available, more investors are entering the market, bringing with them institutional capital and experience.
Life settlement laws are also in place to protect insurance carriers. Today, 30 states have at least a two-year waiting period before a policy can qualify for a life settlement. In Minnesota, a policyholder must wait four years before their policy can qualify. The remaining eleven states have five-year waiting periods. However, most states make exceptions to the minimum waiting periods if the policyholder is terminally ill or has developed a physical/mental disability.
Life Settlement Waiting Periods By State
|Two Year Waiting Period||Four Year Waiting Period||Five Year Waiting Period|
Increased Transparency Revives The Life Settlement Market
Life settlement laws focus on the need for transparency from everyone involved in the marketplace. Insurance carriers must be transparent about the life settlement option with their customers. Policyholders must be transparent with personal and sensitive information in order to qualify for a life settlement. Life settlement brokers must be transparent to policyholders about all available options. These options might benefit policyholders even more than a life settlement, like the accelerated death benefit, for which a broker receives zero commission. Brokers must disclose all fees, commissions, taxes, and counteroffers made for a policy.
These actions of good faith have brought investors back to the market. With the increased supply and demand more cash is entering the market. This drives the price up for policyholders, who stand to benefit in the form of higher settlement offers. In fact, only two consumer complaints involving life settlements have been reported nationally. For an industry that was once overrun with lawsuits, claims of fraud, and complaints, this suggests the industry has been completely rebooted and is ready to be reconsidered.
Judge Rules In Favor Of Disclosure, Sets Legal Precedent
In California, a couple who were unaware of the life settlement option successfully sued their insurance providers for failing to disclose a life settlement as an option. The life insurance company did not inform them of all available options including the life settlement option. So, the couple was forced to reduce the size of their policy by over $5 million!
The couple claimed that their insurance provider (Lincoln National Insurance Company) offered only two options to them. They could:
- Surrender their policy for its cash value
- Pay the increased premiums for the policy.
No mention was ever made of the existence of or their ability to consider a life settlement. This behavior was typical of life insurance companies at the time before full disclosure for policyholders became state law.
In the end, the judge ruled in favor of the plaintiffs. The judge maintained that the insurance provider had a duty to disclose this option to the policyholder. This decision set a legal precedent that had a tremendous impact on the insurance industry as a whole.
Since this ruling, many states have followed suit by implementing disclosure laws that aim to raise awareness of the life settlement option.
For a complete breakdown of life settlement laws by state, please see LISA’s state document report.
States With Mandatory Disclosure Laws
With the support of insurance commissioners, six states have adopted some form of the Consumer Disclosure Model thus far in Washington, Wisconsin, Oregon, Maine, and Kentucky and New Hampshire. Such consumer-focused regulation should be adopted in every state so that policyholders can maximize the true market value of their life insurance policies, rather than simply turning the policies over to the insurers.
|States With Mandatory Disclosure Laws|